Requirements for modern HR

In this series of articles we try to determine the requirements to modern HR professionals - what knowledge, skills and behaviours they need to add value to their organisations efficiently implementing Human Resource Management function.

What do HR mangers manage?

Sometimes it is useful to return back to basics and return to definitions. 

Michael Armstrong the co-author Armstrong's Handbook of Human Resource Management gave the following definition in one of the early editions of his book: 

"People Management includes two interconnected concepts: Human Resource Management (HRM) and Human Capital Management (HCM). 

The term HRM has largely taken over that of ‘personnel management’, which took over that of ‘labour management’ in the 1940s, which took over that of ‘welfare’ in the 1920s (the latter process emerged in the munitions factories of the First World War). 

Human Capital Management (HCM) is connected to HRM with more emphasis on metrics. 

The latest edition of Armstrong's Handbook of Human Resource Management contains more information about HRM and just one chapter on HCM. 

The New CIPD Profession Map (2018) is about being People professionals: "As people professionals, we need to have core knowledge of a range of people practices…" 

Creating value

The New CIPD Profession Map focuses on knowledge and impact business results. It shifts focus from traditional HR practices to areas where people professionals can create value.

So The New Profession Map is about impact, not just activities. The ability to create and calculate value becomes a key skills for HR professionals.

It is important to understand the ethical aspect of people profession to set right priorities. The attitude to employees evolved through the 20th century. First it was considered as "workforce", then as "human resources" and "human capital". Now we are ready to accept that employees are partners who have rights for a part of value the organisation creates.

And HR professionals should understand and balance interests of all stakeholders: not just employees and managers, but clients, suppliers, shareholders, government and community.

How to measure value added by HR

What is the global objective of HR function? In every company HR is a part of the management system.

In business, the main objective of company is to increase shareholder's value.

How shareholders value can be increased?

Basically, the company can increase shareholders value by cutting costs or increasing sales. The shareholders value is maximised when resources are used efficiently.

HR function should participate in creating shareholders value. To do so, HR professionals should be able to measure value they add.

Two questions arise here:

1) How do HR professionals contribute to creating shareholder value?
2) What tools and methods can help to measure it?

In the next few articles we try to answer these questions.

Elements of company's market value

According to popular definition, market value is the price at which an asset would trade in a competitive auction setting. In market value, several factors are considered.

In very simple terms, two methods are used when evaluating the company's value:

1) the method based on evaluating future revenues the company can generate,
2) the method based on costs needed to build or buy similar asset.

So what are elements of the company market value? There three main elements in it: tangible, intangible and latent.

Tangible assets are easy to identify and value, but what types of intangible assets exist? These include:

— business reputation,
— brand awareness,
— credit rating,
— competitive advantage,
— customer loyalty,
— (the most important for us, perhaps) employees skills and experience

Value of intangible assets

There are some special features in evaluating intangible assets.

1) Intangible assets seldom have direct impact on revenue and profit. The impact is generated via a sophisticated and interconnected links. How can skills and expertise of employees be measured in financial terms?

2) Intangible assets depends on organisational context and strategy. They can't be evaluated separately from internal processes. These processes result in client and financial results. The company can evaluate costs it incurs on developing these intangible assets - for example, cost of training. But this figure wouldn't reflect the value the company received.

3) Intangible assets are all about potential. They work in sync with internal processes. If the company has talented researchers and engineers, it needs to have R&D process for talent to add value.

4) Intangible assets work in connection with tangible assets. Both types of assets are needed to create value.

Evaluating intellectual capital

Some researchers prefer to use the term intellectual capital instead of intangible assets. Intellectual capital can be divided into:

1) external infrastructure,

2) internal infrastructure and

3) personnel skills.

In this case the question arises whether or not should the personnel be considered as a separate asset, not connected with the organisational structure and internal processes.

This type of capital has limitations in terms of control and ownership. Ideas and solutions are easy to copy and employees can easily leave the company.

So intellectual capital is very fluid by its nature.

Organisational business model

In the previous articles we discussed the difficulties in evaluating intangible assets. The difficulties are concerned with the fact that it not always easy to document how intangible assets create value.

Any value in any organisation is created via a business model. But what is business model?

According to Wikipedia, business model is "how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts". Any business model is a part of the strategy.

Let's consider some examples.

Example # 1. Transportation company

Creating value: Moving people and goods, transportation services.

Value delivery: Vans, buses, trucks.

Capturing value: Invoicing / selling tickets.

Protecting value: Scale economy.

Example # 2. Advertising agency

Creating value: Informing potential clients about goods and services of value.

Value delivery: TV, websites, radio.

Capturing value: Standard models of calculating services rate - CPM, CPC or CPA.

Protecting value: User profiles.

Example # 3. E-commerce.

Creating value: Providing choice for consumers in shopping.

Value delivery: E-commerce websites.

Capturing value: Card payments.

Protecting value: Low price, more choice.

Intermediate conclusions-1

What conclusions can we draw at this stage?

Firstly, people professionals should measure value the business adds. It is important as all stakeholders expect their fair share of value and HR professionals need to understand their needs and have tools that allow to measure the value provided.

Secondly, technology development makes intangible assets more important than ever. These assets are hard to control and measure. They also require specialised knowledge. HR professionals should have at least the basic knowledge of finance.

Thirdly, the way value is created and delivered defines business model. The transformation of the business model is the strategic element, so HR professionals need to understand how to develop and implement both organisational and HR strategy. So HR professionals should have understanding on how strategy and business models work.

To make everything work, HR professionals need to master project management and change management tools.

Let's consider these requirements in the context of HR function evolution.

Requirements for modern HR

In this series of articles we try to determine the requirements to modern HR professionals - what knowledge, skills and behaviours they need to add value...

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